Rights Issue of Shares

Rights Issue of Shares by a Private Limited Company

Rights Issue of Shares : Concepts & Process

Rights issue of shares means the issue of shares by a company to the existing shareholders to mobilise additional capital to the company. A private limited company issuing further shares shall offer the shares to existing shareholders in the ratio of their holding as rights shares. Issue of rights shares can be at par or at premium.

A company issues shares on the rights basis to mobilise additional capital to meet different requirements. The shares on the rights basis shall be issued only to the existing shareholders and not to the public in general.

The rights given to the existing shareholder is a pre-emptive right in which they get a preference to additional capital issued in the company in order to protect their existing shareholding percentage. The rights mentioned above is not an obligation, in the sense, they can choose not to take up the shares or renounce them in others favour post which their existing shareholding will be diluted.

The Company issues shares on a rights basis as it is the easiest and simplest way of raising additional funds without much cost. 

Rights Issue of Shares - Concepts

a. Authorized Capital & Rights Issue of Shares

Authorized Capital or Registered Capital of a company is the upper limit of capital for which a company can issue shares and collect money from shareholders. The Company issuing shares on rights basis should have sufficient unissued authorized to accommodate further shares. In case the authorised capital is insufficient to accommodate fresh issues of shares, the company should increase the authorised capital first by passing a resolution at a meeting of shareholders.

b. Price of shares for Rights Issue

Rights issue of Shares can be issued ‘At Par’ (Face Value) or at a ‘Premium’ (above Face Value). If the shares are offered at the face value, it is referred as Issue at Par and if the shares are offered at a higher value than Face value, it is referred as Issue ‘At Premium’. 

Generally, if the shares are offered among promoters or their associates immediately after startup of the Company, the shares are offered at Par and if the shares are offered to external investors to mobilise funds, the shares are offered at Premium. Share premium will be fixed on the basis of valuation of shares of the Company considering the future profitability of Company.

(i) Issue of Shares 'At Par'

When shares are issued at the face value of shares, the issue is referred to as ‘At Par’. If the shares are offered among promoters or their associates immediately after startup of the Company, the shares are offered at Par.

For eg: If the face value of Shares is ₹10.00 and the shares are offered at ₹10.00, it is called as issue of shares ‘At Par’.

(ii) Issue of Shares 'At Premium'

When shares are issued at a price higher than the face value of shares, the share issue is referred to as ‘At Premium’. If the shares are intended to be offered to external investors to mobilise funds, the shares are generally offered ‘At Premium’. The amount collected in excess of face value of shares is called ‘Share Premium’.

For eg: If the face value of Shares is ₹10.00 and the shares are offered at ₹100.00, it is called as issue of shares ‘At Premium’. The excess amount of ₹90.00 is referred to as ‘Share Premium’.

c. Valuation of Shares

• In case the shares are issued ‘At Par’, there is no requirement of share valuation is not required
• In case the shares are issued ‘At Premium’,the company has to carry out share valuation under requirements of Income tax Act.
• In case the Rights issue of shares are offered to a Foreign Shareholder, the company has to get a share valuation as per requirements under FEMA.

d. Renunciation of Rights shares by a shareholder

The shareholders have the option to accept or decline or renounce the offer of rights issue. Renouncing the shares means assigning the rights to subscribe the shares to another person.

Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a rights exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person and the notice of offer of rights issue to the shareholder shall contain a statement of this rights of renunciation. 

e. Application for Additional number of shares.

A shareholder who has been assigned with the rights shares or a person who has received the rights through renunciation can apply for lesser or higher than the number of shares assigned to them as rights shares. However, allocation of shares in excess of the rights shares are at the discretion of the board of directors.

f. Timelines for Rights Issue

Offer for Rights issue must be kept open for at least 15 days or such lesser number of days as may be prescribed by the Board of Directors. Offer for Rights issue should not be kept open for more than 30 days. If the offer is not accepted within the prescribed timelines shall be deemed to have been declined.

g. Issue of Rights shares to persons other than shareholders

After the expiry of the rights issue offer time,  or at an early date if the shareholder to whom the rights shares are offered declines the rights by a notice, the Board of Directors may dispose of unsubscribed rights shares in such manner which is not dis-advantageous to the shareholders and the company. This means the Board can allot unsubscribed rights shares to any third party of its choice after the rights issue closing date. Also, there are no timelines prescribed under that Act and Rules within which the board can allot the shares to a person other than existing shareholder.

h. Dilution of Shareholding by existing shareholders

When a company issues additional shares on the rights issue basis or otherwise, the shareholding percentage of existing shareholders will be changed unless all the existing shareholders have subscribed the entire rights shares.

Dilution of shareholding means the changes in the shareholding percentage of existing shareholders due to disproportionate subscription of shares or by allocation of  to a third party, either by renunciation or by the exercise of Board powers.

Rights Issue of Shares - Process

1.Board  Meeting:

The Board of Directors of the Company has to decide the following at its Board meeting:

• Issue additional shares on Rights basis to existing shareholders
• Ratio at which the Rights shares are offered.
• Price at which the shares are to be issued.
• Timelines for Opening/ Closing of Rights Issue.

2. Rights Issue Offer Letter

The company has to send a Letter of Offer to the shareholders of the Company. The notice of the issue of shares should be sent to the shareholders by offering them an option to take the shares offered to them. 

The Letter of  offer should be sent to all the shareholders through the registered post or speed post or through electronic mode and the letter shall dispatch at least three days before the opening of the issue.The number of shares offered must be specified in the notice.

3. Receipt of Share subscription money 

The shareholders who accepted the offer shall send the application money along with the application of acceptance.

4. Allotment of Shares

After the closing of Offer period of Rights Issue, the Board of Directors at its meeting  shall allot the shares to the shareholders who have accepted the offer of rights issue of shares.

5. Filing Return of Allotment (Form PAS-3)with Registrar of Companies (ROC)

After the allotment of shares, the company has to  file the Return of Allotment (Form PAS-3) with payment of appliance filing fee to the office of Registrar of Companies (ROC) within 30 days from the date of allotment of shares certified by a Company Secretary in Practice / Chartered Accountant in Practice or Cost Accountant in Practice with appliance filing fee

A certified true copy of resolution and the list of allottees shall be enclosed with the form PAS-3.

If the Return of Allotment is not filed within 30 days from the date of allotment additional fee for filing the return will also be attracted. 

6. Issue of share certificate 

The company has to issue Share Certificates to each allottee of Rights Issue within 2 months from the date of the allotment of the shares.

The Share Certificates in Form No. SH-1 and the Certificate must contain the Name of the person to whom it is issued along with his folio number and Number of shares, and its distinctive number and Amount paid on those shares.

Share Certificate issued by the Company has to be stamped as per the respective State Stamp Act and Stamp Rules. Stamp Duty on Share Certificate varies state to state. Non-payment of stamp duty on share certificates shall invalidate the share certificates as such

If the Company defaults in delivering the share certificates within the period prescribed, the company shall be liable to a fine of Rs.25,000.00 to  Rs.5,00,000.00 and every officer in default shall be liable to a fine of Rs.10,000.00  to Rs.1,00,000.00